Papa John’s (NASDAQ:PZZA) has made a deal with hedge fund Starboard Value aiming to take it out of the orbit of founder John Schnatter. Starboard agreed to take a hefty slice of Papa John’s, as much as 20%, and seek a new strategic direction. Starboard Value CEO Jeffrey Smith is now chairman of the pizza chain’s board, and former Pinnacle Entertainment CEO Anthony Sanfilippo has been added, along with CEO Steve Ritchie.
Starboard is investing an initial $200 million, with a convertible option of $50 million more, half of which will be used to reduce debt and half of which will be used in the business. PZZA stock had a market cap of $1.21 billion on Feb. 1, but rallied more than 10% on the news — a gain nearly equal to the value of Starboard’s investment.
Bye, Papa
Papa John’s has been going nowhere fast ever since the highly publicized fall last year of former CEO, and founder, John Schnatter, who was accused of creating a toxic culture at the company, running the publicly traded corporation as personal property.
On the way out, Schnatter sabotaged his company’s corporate image by verbally attacking NFL Players over political protests, quitting the chain’s lucrative NFL sponsorship deal and cursing in company conference calls, which had the chain accused of racism and ultra-right politics.
Since leaving, Schnatter has been trying to regain control. The board publicly rejected Schnatter’s latest bid, while accepting the Starboard offer.
Schnatter’s offer of cash was identical to Starboard’s, but the company decided the man who had once been ubiquitous on its TV commercials, as well as its CEO had become toxic, especially after he sued the company following his resignation.
Papa John’s Stock and the Decisions to Come
The value of PZZA stock is now down by half from its late 2016 high while those of rival chains like Domino’s Pizza (NYSE:DPZ) have soared. Even with the Feb. 4 pop, Papa John’s is still selling at a discount to its annual sales, while rival chains sell at many times their sales volume.
Ritchie, who began running daily operations in 2014 and was named CEO in January 2018, then became the target of a Schnatter campaign to fire him by the summer, seems to be the key winner in this deal.
A release from the new management was short on details for how they might turn the company around, other than by making better pizza. The big opportunity here might be Papa John’s international push, which by the end of 2017 had one-third of the chain operating outside the U.S.
The Bottom Line on PZZA Stock
If Papa John’s follows the Domino’s playbook, and it’s one many other pizza chain operators are trying to follow, it will now expand the menu, launch new technology and delivery initiatives, and possibly redesign the stores with help from franchisees.
Doing all that, however, will require cooperation from Schnatter, who still owns 30% of the company, and very likely the hiring of an outsider as CEO, possibly from a rival chain like Domino’s, Yum! Brands (NYSE:YUM) or even McDonald’s (NYSE:MCD) as CEO.
Starboard could also seek to sell the company, either to one of those firms or Restaurant Brands International (NYSE:QSR), since the owners of Burger King and Tim Horton’s don’t yet have a pizza chain. Other potential buyers might be Inspire Brands, owner of Arby’s, or JAB Holding Group, the German company that has been buying up breakfast chains like Caribou, Einstein’s Bagels and Krispy Kreme.
Either way, if the company can just put a period on the Schnatter era, Papa John’s stock is cheap enough to rise substantially from here.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in QSR.
